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The Economy’s Coming Wile E. Coyote Moment

Warner Brothers/The Fiscal Times

By Michael Rainey

November 15, 2018

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Most economists think that the “sugar high” in the economy produced by simultaneous tax cuts and federal spending increases this year will fizzle at some in the next few quarters, at which point GDP growth will drift back down to its long-term trendline in the range of 2 percent.

Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, said earlier this week that he expects the fiscal stimulus to run out by 2020. Shepherdson provided a colorful description in Politico Thursday, sure to please fans of the classic Looney Tunes cartoons, of how that running out could develop:

“The first punch will be the lag effect of rising interest rates. Rates work slowly, but they do work eventually. And the second will be that by 2020, without a further package from Congress, the stimulus will be done. You put all these together and it’s a little like Wile E. Coyote running over the cliff. You look down, and the ground you thought was under you suddenly isn’t there anymore.”

Along the same lines, Democratic economist Jared Bernstein highlighted this chart from Goldman Sachs, which suggests that federal tax and spending policies will start detracting from economic growth starting in the second quarter of 2020. “We’ve squandered our fiscal policy,” Bernstein wrote, leaving few options for dealing with the next, inevitable downtown.